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Disparate Impact in Fair Lending: a Theory Without a Basis & the Law Of

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Disparate Impact in Fair Lending: a Theory Without a Basis & the Law Of ELECTRONICALLY REPRINTED FROM FEBRUARY 2014 Disparate Impact in Fair Lending: A Theory without a Basis & the Law of Unintended Consequences By Andrew L. Sandler and Kirk D. Jensen he disparate impact theory of discrimination allows agencies and/or community organizations receiving govern- T the government or a private plaintiff to establish dis- ment funding, both cases settled shortly before oral argument, crimination based solely on the outcome of a neutral policy, denying the Supreme Court the opportunity to rule on the without having to prove any actual intent to discriminate. longstanding issue. Although the text of the Fair Housing Act (FHA) does not create liability for facially neutral activities with unequal The Theory effects, lower court decisions over the years have relied on The disparate impact theory of discrimination allows jurisprudence focused on other statutes with different lan- a party to establish discrimination based solely on the guage, agency guidance, and selective readings of legislative results of a neutral policy. Disparate impact is distinct history to permit disparate impact claims. The US Supreme from disparate treatment because a party is not required to Court more recently has issued several decisions undermining show any intent to discriminate. To establish a disparate this broad focus on the goals of the FHA, holding that the impact claim, a government agency or private plaintiff plain language of an anti-discrimination statute—and not a must show only that an otherwise neutral practice dispa- broad interpretation of its purpose—is dispositive of whether rately affects qualified members of a protected class. disparate impact claims are permitted. Nonetheless, these Supreme Court cases have not addressed the use of disparate Application of Doctrine in FHA Actions impact under the FHA directly, and federal regulatory and The notion that the Fair Housing Act (FHA) per- enforcement agencies with fair lending enforcement authority mits disparate impact claims originated in three lower seeking to achieve broad policy objectives increasingly seek court decisions in the 1970s—United States v. City of to rely on disparate impact claims to advance their agenda. Black Jack,1 Metropolitan Housing Development Corp. v. Because lenders have been reluctant to engage in protracted Village of Arlington Heights (Arlington Heights II ),2 and litigation with these agencies, disparate impact analysis con- Resident Advisory Board v. Rizzo.3 None of these cases tinues to be effectively used to place affirmative obligations held that the statutory text of the FHA permitted on lenders with respect to the underwriting and pricing of disparate impact claims—indeed, one of these cases, loans to protected-class borrowers designed to achieve statisti- Arlington Heights II, acknowledged that the text of the cal equivalence between groups. In effect, this result chills FHA requires a showing of intent to discriminate to innovation and reduces the breadth of credit available to establish claims of discrimination.4 Rather, these courts qualified borrowers, causing lenders to retreat from offering focused on cases decided under other laws and what the lending products and services that could increase vulnerability courts viewed as the broad purpose of the FHA. Lower to claims of discrimination based only on statistical outcomes courts subsequently followed these original three of objective and neutrally applied lending criteria. The FHA disparate impact decisions and incorporated the Supreme Court signaled its interest in addressing directly rationale set forth in those opinions. However, recent the threshold question of whether the FHA permits dispa- Supreme Court precedent focused on other discrimi- rate impact claims last term and again this term, granting nation statutes now has undermined this approach.5 certiorari on the issue in two successive cases. However, with Nonetheless, in the absence of a Supreme Court deci- the active encouragement and participation of government sion directly addressing the appropriate discrimination standard under the FHA, government agencies and the Andrew L. Sandler is Chairman and Executive Partner of occasional lower court continue to permit use of dis- BuckleySandler LLP and Kirk D. Jensen is a partner in the firm’s parate impact analysis to advance discrimination claims Washington D.C. office. in the lending context. 1 • Banking & Financial Services Policy Report Volume 33 • Number 2 • February 2014 Interagency Adoption of Standard burden-shifting approach to establishing liability under and Subsequent Enforcement this theory.10 The rule was finalized in 2013, just weeks Government agencies with fair lending enforcement after the Supreme Court agreed to hear a second case powers issued a broad interagency Policy Statement raising the question of whether the FHA permits dis- on Discrimination in Lending in 1994. The Policy parate impact claims.11 The final rule (HUD Rule) Statement addressed many aspects of the government’s ostensibly authorizes private and governmental plain- fair lending expectations of banks and other entities tiffs to assert discrimination under the FHA based on engaged in lending activity. Among the guidance mortgage-lending practices that have a disparate impact provided was a statement that liability for violations on a protected class of individuals or that otherwise of both the FHA and the Equal Credit Opportunity create, increase, reinforce, or perpetuate segregated Act (ECOA) could be based on evidence of disparate housing patterns, even if the practice is facially neutral impact.6 At the same time, the Federal Reserve Board and there is no evidence of discriminatory motivation.12 (FRB) amended its commentary to Regulation B Subsequent to HUD issuing its proposed rule on dispa- implementing ECOA to note that use of the disparate rate impact, the Consumer Financial Protection Bureau impact theory is appropriate.7 However, these state- (CFPB) also took the position, relying on Regulation B, ments were made in the context of a broad Policy that ECOA permits disparate impact claims.13 The DOJ Statement, which expressly recognized that factors such has similarly reaffirmed its position that both the FHA as borrower’s income, continuity of income, adequacy and ECOA permit disparate impact claims.14 of collateral, and availability of funds to close— objective considerations that often “effect” the decision Recent Supreme Court Jurisprudence on whether to make and how to price a loan—remain Establishing Primacy of the Statutory Text relevant to credit decisions.8 Given the continued This relatively new reliance by the DOJ and other commitment to the notion that these objective factors government agencies on the disparate impact theory appropriately might “effect” the lending decision, gov- analysis is directly inconsistent with recent Supreme ernmental fair lending enforcement activity from 1994 Court jurisprudence setting forth the appropriate lim- until 2008 continued to be focused almost exclusively its in use of the disparate impact theory. In 2005, the on cases in which disparate treatment could be proven. Supreme Court clarified its position with respect to During this period no government fair lending cases congressional antidiscrimination statutes, explaining were brought based exclusively on statistical analysis that the text of an antidiscrimination statute is disposi- showing nonequivalent results in availability or pricing tive of whether disparate impact is available.15 of credit without regard to borrower loan qualifications or risk. In Smith v. City of Jackson,16 the Court clarified that its decisions permitting disparate impact claims in employ- This approach to fair lending enforcement changed ment cases were based on specific language in Title VII in 2009 when the Department of Justice Civil Rights and not broad interpretations of the statute’s general Division (DOJ) announced that it would now pur- purpose. The Court explained that Title VII contains sue fair lending cases based on statistical evidence two different provisions that prohibit discrimination: that neutral lending practices were having dispropor- One that requires a showing of intent to discriminate, tional effects on members of protected classes. The and a second which provides that an employer may not Department of Housing and Urban Development take actions that negatively “affect” a person’s employ- (HUD)—the executive agency charged with adminis- ment on the basis of race, sex, and other attributes. tering, interpreting, and enforcing the FHA—soon fol- The City of Jackson Court explained that this “effects” lowed with similar pronouncements. Since that time, language permits disparate impact claims and does not the DOJ and HUD have brought numerous cases based require a showing of intent. However, a close reading on that theory.9 of the FHA and ECOA reveals that both statutes have only the language that the Supreme Court explained Most recently, HUD issued a proposed regulation requires claimants to prove intent to discriminate—and purporting to authorize discrimination claims based on neither statute has the “effects” language that the Court disparate impact under the FHA and codify a three-step, explained permits disparate impact claims. Volume 33 • Number 2 • February 2014 Banking & Financial Services Policy Report • 2 The ‘Effects’ Test his status as an employee, because of such individual’s” The question before the Supreme Court in City race or age.22 The phrase “otherwise
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